The Reverse Supply Chain

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In recent years, your company has probably spent a lot of time and money fine-tuning its supply chain. Soon you may need to give just as much thought to your reverse supply chain. What is a reverse supply chain? It’s the series of activities required to retrieve a used product from a customer and either dispose of it or reuse it. And for a growing number of manufacturers, in industries ranging from carpets to computers, reverse supply chains are becoming an essential part of business.

In some cases, companies are being forced to set up reverse supply chains because of environmental regulations or consumer pressures. Beginning in 2003, for example, European Union legislation will require tire manufacturers operating in Europe to arrange for the recycling of one used tire for every new tire they sell. In other cases, companies are taking the initiative, seeing opportunities to reduce their operating costs by reusing products or components. For instance, Kodak remanufactures its single-use cameras after the film has been developed. Over the past decade, the company has recycled more than 310 million cameras in more than 20 countries. Finally, some companies are using reverse supply chains as integral parts of new businesses. Bosch, for instance, has built a successful business selling power hand tools that have been remanufactured.

Whether a company is establishing a reverse supply chain by choice or necessity, it will face many challenges. It will have to educate customers and establish new points of contact with them, decide which activities to outsource and which to do itself, and in general figure out how to keep costs to a minimum while discovering innovative ways to recover value. It may also have to meet stringent environmental standards.

To make rational decisions about the structure of a reverse supply chain, it’s best to divide the chain into its five key components and analyze options, costs, and benefits for each:

Product Acquisition. Our research suggests that this task—retrieving the used product—is key to creating a profitable chain. The quality, quantity, and timing of product returns need to be carefully managed. Otherwise, companies may find themselves flooded with returned products of such variable quality that efficient remanufacturing is impossible. Companies often will need to work closely with retailers and other distributors to coordinate collection.

Reverse Logistics. Once collected, products need to be transported to facilities for inspection, sorting, and disposition. There is no one “best” design for a reverse logistics network; each has to be tailored to the products involved and the economics of their reuse. Bulky products like tires, for instance, will require very different handling than small but fragile products like cameras. Companies should consider not only the costs for shipping and storing but also how quickly the value of the returned products will decline and the need for control over the products. In many cases, it will make sense to outsource the logistics to a specialist.

Inspection and Disposition. The testing, sorting, and grading of returned products are labor-intensive and time consuming tasks. But the process can be streamlined if a company subjects the returns to quality standards and uses sensors, bar codes, and other technologies to automate tracking and testing. In general, a business should seek to make disposition decisions—based on quality, product configuration, or other variables—at the earliest possible stage in the returns process. That can eliminate many logistics costs and get remanufactured products to market faster.

Reconditioning. Companies may capture value from returned products by extracting and reconditioning components for reuse or by completely remanufacturing the products for resale. Reconditioning and remanufacturing processes tend to be much less predictable than traditional manufacturing because there can be a large degree of uncertainty in the timing and quality of returned products. Again, making smart decisions early in the chain—in particular, when you accept and sort returns—will help to reduce manufacturing variability and, hence, costs.

Distribution and Sales. If a company plans to sell a recycled product, it first needs to determine whether there is demand for it or whether a new market must be created. If it’s the latter, the company should expect to make heavy investments in consumer education and other marketing efforts. Potential customers for remanufactured products or components include not just the original purchasers but also new customers in different markets. The company may, for example, want to target customers who cannot afford the new products but who would jump at the chance to buy used versions at lower prices.

In general, the companies that have been most successful with their reverse supply chains are those that closely coordinate them with their forward supply chains, creating what we call a closed-loop system. For example, they make product design and manufacturing decisions with eventual recycling and reconditioning in mind. Bosch is a good example. It builds sensors into the motors of its power tools, which indicate whether the motor is worth reconditioning. The technology dramatically reduces inspection and disposition costs, enabling the company to make a profit on the remanufactured tools. Even with reverse supply chains, forward thinking pays big dividends.

A version of this article appeared in the February 2002 issue of Harvard Business Review.

V. Daniel R. Guide Jr. is an associate professor of operations management at the Duquesne University School of Business Administration in Pittsburgh.